Section 194N: TDS on Cash Withdrawal - Applicability, Exemptions & TDS rates

Section 194N of the Income Tax Act was introduced to encourage a cashless society and promote the vision of Digital India by discouraging cash transactions. The intent behind this initiative is that when individuals face a Tax Deducted at Source (TDS) on cash withdrawals, they are more likely to adopt digital payment methods for their transactions. This act aims to reshape societal behaviour, fostering a preference for digital transactions that align with the government’s goal of reducing the reliance on cash. This Section 194N was effective from September 1, 2019, applies to the financial year 2019-2020 and establishes a framework for TDS on cash withdrawal. This article explains more about Section 194N, its applicability, exemptions, and the applicable TDS rates. Get expert help from IndiaFilings to file TDS returns effortlessly! [shortcode_35]

What is Section 194N TDS on Cash Withdrawal?

Section 194N of the Income Tax Act mandates tax deduction at source (TDS) on cash withdrawals exceeding certain thresholds from banks, post offices, or cooperative societies. Under section 194N, if an individual withdraws cash exceeding ?1 crore in a financial year, the TDS rate is levied at 2%. For individuals who have not filed income tax returns in the preceding three years, the TDS rate increases to 2% on cash withdrawals between ?20 lakh and ?1 crore and 5% on withdrawals above ?1 crore. As mentioned, This provision aims to discourage cash transactions and promote digital payments, enhancing transparency in financial dealings.

Benefits of Section 194N of Income Tax Act

Here are some key benefits of Section 194N of the Income Tax Act:

Encouragement of Digital Transactions: By imposing TDS on cash withdrawals exceeding specified limits, Section 194N incentivises taxpayers to adopt digital payment methods, promoting a cashless economy.
Increased Transparency: The requirement for TDS deductions enhances transparency in financial transactions, reducing the chances of tax evasion and fostering accountability among taxpayers.
Regulatory Compliance: Financial institutions are mandated to deduct TDS, ensuring that both banks and taxpayers adhere to tax regulations, ultimately leading to a more organised tax collection system.
Taxpayer Awareness: The provisions of Section 194N raise awareness among taxpayers about their financial activities and the importance of compliance with tax laws, encouraging responsible financial behaviour.
Alignment with Government Goals: The section aligns with the government's broader goals of reducing reliance on cash, combating black money, and facilitating a more efficient taxation system.
Potential for Refunds: Taxpayers who have TDS deducted under Section 194N can claim refunds or adjustments against their total income tax liability, providing them with an avenue to recover excess tax deductions.

Who is Responsible for TDS deduction under Section 194N?

Under Section 194N of the Income Tax Act, the responsibility for deducting TDS on cash withdrawals lies with the payer, including banks (private, public, or co-operative) and post offices. These financial institutions must deduct TDS when customers withdraw cash exceeding the prescribed limits within a financial year. This 194N TDS deduction applies to one-time cash withdrawals as well as cumulative amounts exceeding ?1 crore withdrawn over the specified financial year.

Applicability of Section 194N TDS Act

This section 194N TDS deduction is applicable to a wide range of taxpayers, including:

Individuals
Hindu Undivided Families (HUFs)
Companies
Partnership firms
Limited Liability Partnerships (LLPs)
Associations of Persons (AOPs)
Bodies of Individuals (BOIs)

Exempted Persons from Section 194N TDS Act

Certain entities are exempt from TDS under Section 194N of the Income Tax Act when making cash withdrawals. These exemptions include:

The Central and State Governments
Public and private sector banks
Cooperative banks
Post offices
Business correspondents associated with any bank
White-label ATM operators linked to any bank
Commission agents or traders specified by the Central Government who operate under the Agriculture Produce Market Committee (APMC) and make payments to farmers for the purchase of agricultural produce
Authorized dealers, their franchise agents and sub-agents, as well as Full-Fledged Money Changers (FFMC) licensed by the Reserve Bank of India (RBI) and their franchise agents
Any other individuals or entities notified by the Government in consultation with the RBI.

TDS Rates Deducted under Section 194N

Under Section 194N of the Income Tax Act, the standard TDS rate on cash withdrawals exceeding ?1 crore is set at 2% on the amount above this threshold. However, for individuals who have not filed their income tax returns in the three years preceding the current financial year, stricter rates apply. For these non-filers, cash withdrawals ranging from ?20 lakh to ?1 crore incur a 2% TDS rate, while withdrawals above ?1 crore are subject to a higher TDS rate of 5%. The following table captures these TDS rate differences clearly,

Cash Withdrawal Amount	TDS Rate
Above ?1 crore	2%
?20 lakh - ?1 crore*	2%
Above ?1 crore*	5%

*For individuals who have not filed income tax returns in the three years prior to the current financial year.

What If Taxpayers have multiple bank accounts?

If a taxpayer has multiple bank accounts, the TDS deduction under Section 194N applies collectively across all accounts. This means that withdrawals from different bank accounts are aggregated to assess if they exceed the threshold of ?1 crore within a financial year. If the total cash withdrawal across these accounts surpasses ?1 crore, TDS will be deducted on the excess amount. Each bank monitors withdrawals separately, but they are required to ensure compliance collectively when calculating TDS based on the total amount withdrawn across all accounts.

How to Claim a Refund of TDS Deducted under Section 194N?

To claim a refund of TDS deducted under Section 194N, or to have it adjusted against your total income tax liability, you must file an income tax return (ITR). This process is applicable if your annual income does not exceed the basic exemption limit, making you eligible for a refund of the deducted amount. Filing an ITR is mandatory for claiming this refund, as it allows the excess TDS to be adjusted based on your total income tax liability. By completing this filing process, you can either receive a refund or offset the TDS against any taxes owed.

Conclusion

In conclusion, Section 194N of the Income Tax Act: TDS on cash withdrawal serves as a significant measure to discourage cash transactions and promote digital payments, aligning with the government's vision of a cashless society. By imposing TDS on cash withdrawals exceeding specified thresholds, this provision not only enhances transparency in financial dealings but also encourages taxpayers to adopt more efficient transaction methods. Understanding the applicability, exemptions, and TDS rates under Section 194N is crucial for individuals and entities to navigate their tax obligations effectively.

Latest Notification on 20th September 2019

As per the notification dated 20th September 2019, exempted TDS for making payment to farmers viz., the commission agents or traders specifies the commission agent or traders operating under Agriculture Produce Market Committee (APMC). The exact text of the notification is provided below: In exercise of the powers conferred by clause (v) of the proviso to section 194N of the Income-tax Act, 1961 (43 of 1961), the Central Government after consultation with the Reserve Bank of India, hereby specifies the commission agent or trader, operating under Agriculture Produce Market Committee (APMC), and registered under any Law relating to Agriculture Produce Market of the concerned State, who has intimated to the banking company or co-operative society or post office his account number through which he wishes to withdraw cash in excess of rupees one crore in the previous year along with his Permanent Account Number (PAN) and the details of the previous year and has certified to the banking company or co-operative society or post office that the withdrawal of cash from the account in excess of rupees one crore during the previous year is for the purpose of making payments to the farmers on account of purchase of agriculture produce and the banking company or co-operative society or post office has ensured that the PAN quoted is correct and the commission agent or trader is registered with the APMC, and for this purpose, necessary evidence has been collected and placed on record. The notification is provided below:

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